Obama Administration Finds a Way to Get Businesses Borrowing Again


It has induced some companies to borrow in order to pay special dividends:

Companies that issue dividends, or are considering special dividends, are being pushed by shareholders to issue them before year-end because of rising concern that any deal in Washington to avoid the so-called fiscal cliff — of tax increases and spending cuts that looms at the end of the year — could include letting taxes on dividends rise.

For some companies, issuing debt to pay dividends makes sense right now because interest rates are so low and bond investors are clamoring for more securities, especially from companies that don’t issue regularly. If they can cheaply finance a boost in their stock prices, some companies will take that, even if the idea is detrimental to their own bondholders, because it adds to company debt obligations without boosting growth or their ability to pay back the debt.

Debt sales to finance dividends haven’t been very common since the credit crisis began in 2008, because both stockholders and bondholders have less appetite for something seen as a little more precarious to a company’s health.

But bondholders are now allowing companies to do it relatively cheaply because they’re so desperate for yields on corporate debt that are often just slightly higher than what is available on Treasury bonds.

This means that firms are leveraging themselves to pay off their shareholders. That debt could have financed additional investment, R&D, or acquisition of other firms. Instead, firms are going to the debt market, or even to banks, to turn equity into debt — all because the President is insistent that dividends be taxed as ordinary income. If you wanted there to be less leverage in markets as a matter of public policy, you would want dividends to remain tax-preferred.

(UPDATE: A Twitter comment pointed me to the fact that Costco’s credit rating was cut by one agency after the special dividend announcement.)

Members have made 3 comments.

  1. Thatcher

    Ah yes – all those rich folks like Warren Buffet who could afford to pay more taxes but do everything in their power not to. Like the CEO of Costco, these folks – the rich who say they should pay more, not all rich – are raging hypocrites.

    There is nothing wrong with legal tax avoidance but to advocate higher taxes and then game the system (Google!) shows how morally bankrupt the Left truly is.

    • #1
    • December 11, 2012 at 5:38 am
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  2. Member

    Let’s see…

    The companies will borrow to pay dividends. The investors will get money they will then spend. The economy will boom because of this extra new spending. This is a winning situation!

    What? The companies have to pay that money back? That takes money back out of circulation? The economic boom fails? We’re back to where we started? Hmmmm. Well…

    • #2
    • December 11, 2012 at 6:43 am
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  3. Member

    Starting a countdown until the Keynesians claim it was government spending that spurred this little “economic boom”…

    • #3
    • December 11, 2012 at 9:02 am
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